A recession is always right around the corner, so preparing for unsettling times before they occur is the key to weathering the recession storm.
It seems that we are currently on the cusp of challenging economic times, with the socializing restrictions still in place, “everyone is a cook on Instagram” trend, and economic lines flatlining or worse – downturns, the restaurant industry is hit hard.
There is a well-known quote by Benjamin Franklin, that goes “by failing to prepare, you are preparing to fail.” In this article, we are going to take this time tested advice, and take tactical and reasonable steps to prepare our businesses for a future, one where a recession might be prevalent.
A recession shortly seems inevitable, even if it may be months or a year or two off. While we cannot control the economic engine of the market cycle, we can control certain aspects of our restaurant business, so preparing for this coming market downturn it is our top priority.
This article covers some detailed steps that every restaurant can take to safeguard their businesses from the financial recession. Taking a strategic approach to it can shield us from heavy or unexpected losses, and avoid bankruptcy or business closure.
Read Also: Domino’s Epic Turnaround of 2020
Table of Contents
Get Better Terms From Suppliers and Vendors
As much as you want to save money on your supplies, your vendors want to keep you as a customer. What does this mean in layman’s terms?
It means that you can reach a mutually beneficial arrangement at reduced prices or extended terms with some smart yet straightforward steps. Here are some of these steps and approaches:
Plan for Less Delivery Frequency
For restaurants that deal with fresh foods (seafood, bakery), the deliveries are often daily/weekly. Delivery charges are usually passed on the restaurant and can be expensive. During a recession or a decreased volume period, there is less demand.
The orders will most likely shrink, and the lesser quantities can be stored in the kitchen’s limited spaces. Additionally, by planning future orders and optimizing purchases, you can always save on the reduced delivery counts as well.
Do Your Research
We all know that when negotiating, letting the other party know that you have options is a great tool. Research about potential vendors in your market and find their prices, deals, and discounts. Also, learn about your product’s market price and fluctuation to benchmark your purchase price against it.
When renegotiating with your vendors/suppliers for the recession period, communicate your knowledge about any lower cost, and use this as leverage in negotiations. Remember, sometimes you have to walk to get what you want!
Change the Time of Your Delivery
When you allow the vendor/supplier to choose the delivery time according to them – it is possible to negotiate delivery prices. So, instead of having an early morning delivery, adjust your inventory according to the supplier’s delivery time.
Usually, with a key drop delivery or late-night delivery times, there is a high chance to bring down the prices (for convenience sake).
Don’t Fall Into Price Semantics Trap
Vendors often use different pricing strategies, and you must make sure to understand them (as your restaurant’s life depends on it). To elaborate, think about the cost plus percentage pricing. It is when the price increases in proportion to the cost.
So when you opt for this, you pay a vendor more as the food price increases, which goes against all business logic and economies of scale. This structure could disturb your cost planning and is often misused by the supplier. Try to opt for more fixed-price arrangements, or have a cap on the percentage increase.
Also, make sure that the pricing remains constant, or you know the timeline for its increase. Many times, vendors have different present and future prices. Have a written agreement for pricing where the structure, schedule, expansion, method, etc. are all laid out correctly by both the parties.
Use Multiple Vendors
Multi-sourcing comes with a lot of advantages. Firstly, it ignites a competition between different vendors. This approach can help you with increased quality, reduced prices, and other such benefits that the vendors will provide to stand out.
Next, it is wiser not to depend on one supplier. Especially when you are planning to lean your operations, there are fewer options to delay payments when all your goods are coming from one supplier. When one of the supplier’s delays or defaults, it is easier to replace one area than having to find another contractor that can provide you with all your needs.
Reduce or Eliminate Debts
“Debts are the true culprit of financial distress.” You have probably heard this before, and you like me, know that they are not kidding. When there are payments due regularly, having challenges in your revenue streams can be dangerous if not disastrous for a business.
The first step here will be to understand if your debt is too much for your business. A debt load is usually too much when the business (restaurant), in this case, does not generate enough in profits (net income) to cover the principal plus interest.
There are lots of rules of thumbs out there, but it depends on your business structure. Are owners paying themselves out of distributions, out of
The percentage of debt service to net income could vary highly. So, look into your revenue streams and check if a reduction of top-line sales is still enough to cover your monthly debt commitment. Take a close look at all your business debts.
There are multiple ways to reduce or pay-off your debt when you think you have too much of it. Here are some of the most commonly used approaches:
Pay in Advance and Reduce Debt
If you can gather funds from your savings, reserves, current revenues, or personal savings, you can pay it off before your cash-strapped period starts. Selling a part of your business (selling equity) is another common way for many restaurants to pay off their debts.
This tactic is one of the best routes to go through when you do not want to hinder your relationship with the lender.
Many lenders have the policy to help out when the times are tough. This method includes negotiating in terms of lowering the amount, reducing the interest rate, or extending the pay-back period. Ideally, when the market cycle has a downturn, these lenders operate as if some money is better than no money.
This approach is very nuanced, so I recommend you reach out to your lender directly and start the conversation.
Transfer Debt to Low Interest Loans
Debt consolidation is also a commonly used concept, where you take out a bigger loan with better-suited payoff terms and interest rates to pay off multiple debts. By combining multiple debts into a single one, extending the term, the net result is a lower monthly payment.
Now combine that with a more competitive interest rate (which is usually available when restructuring) you are making real headway on reducing your debt to income ratio. At the same time, do not fall into the trap and ensure that you can keep up with its terms during the recessionary downtime.
Lower Restaurant Inventory Levels
Inventory levels equate to dollars sitting on the shelf. Reducing inventory levels means you are increasing your cash position or cash on hand. This maneuver helps pay other bills, pay employees, or pay yourself. In a recessionary environment, every dollar counts. You also want to meet demand and avoid food waste, so keeping it too low or too high to save costs is not that simple; you have to find the perfect balance.
All that said, lowering your inventory can be instrumental in helping you survive a recessionary period.
Here are some tips and tricks:
Determine the Minimum Stock Required
One industry formula to help in this case is as follows:
Min level = (Weekly inventory use + Safety stock)/deliveries per week
So, if you need 15 pounds of an item and 3 pound as safety, and you have 2 deliveries of that per week. Then,
Min level = (15 + 3)/2 = 9 pounds
Determining this for all/major items will help you keep an optimal inventory during the tough times.
Account for Fluctuations in Demand and Supply
Keeping inventory at optimal levels should not interfere in meeting demand, especially when the need is already low. Looking out for fluctuation in both demand and supply is essential.
Supply-side – National holidays, price increase, supply chain issues, and more can affect the supply side of the equation. These could affect your delivery schedule and hence should be taken into account when ordering and planning.
Demand-side – Holiday season, parades, festivities, and seasonality can affect the demand side. These could increase or decrease your demand, and hence accounting them to adjust your inventory will help you meet the customer’s expectations.
While increasing your frequency could increase your delivery expenses, frequent delivery could also mean you can keep your inventory levels low. Try to do the trade-off between the cost of two and analyze which is a better-suited option for your restaurant.
This tact could also vary product to product, supplier to supplier. Remember, a $40 additional delivery fee greatly outweighs keeping an extra $5,000 in meats in the fridge, it’s roughly a 4 figure savings!
Identify Dead Stock Inventory
There are usually many inventory items that turn slowly or not at all. Find new ways to get rid of your old stock and avoid reordering them in the future. Yes, it sounds simple, but we all do it and need a reminder.
For instance, sell menu items with those ingredients at discounted deals. This chef’s specials on Friday night! With liquors, you can create cocktails if those ingredients can be utilized and sold in other forms – lookout for those options.
Lastly, weekly or nightly monitoring your newer inventory can help you optimize even better. Remember to conquer inventory; you have to evolve and change continually. Recessions are tough, and usually, business owners project pessimistically. Taking a look regularly and adjusting will give you a good idea of your restaurant’s required levels.
Remove Unprofitable Products
Every restaurant keeps a range of items to cater to different tastes, but only some of them are profitable. During regular times, it is not so bad to have a wide range, with some underperformers on the menu. But during the tougher times – it makes sense to cut some of these unprofitable items from the menu. It is not about what sells the most; it is about what contributes the most in gross profits.
Identify the Problem Child
Get a good understanding of which items are contributing to the bottom line and which are not. You should already have a sales system (POS) to track your items and their sales.
Use data from this system to see which items sell and at what rate, then break down each of these items to see their cost and profit contribution. You will quickly find that some products are not worth even keeping in inventory!
Bring Changes to Your Items to Increase Profitability
When you consider the cost of your items, it is not just the ingredients but also the labor cost and time that goes into it. Tweaking your menu items during the recessionary period can help you reduce costs and hence increase profit margins.
For instance, handcrafted pastries are a great example. These take time to prepare, plate, decorate, and so on. But instead of eliminating them – you can have either other desserts or change the current ones to reduce the labor costs and efforts.
Eliminate Meal Times or Days of Service
During a recession, people will still eat out. They may skip leisure brunches or breakfast out, and only go for dinners or just cocktails instead to have some unwinding time. In this case, cutting out your breakfast or lunch and focusing on dinners will help you target your resources to more profitable menu items and also cut labor costs.
Monday for many restaurants is notoriously slow. So when a recession is looming or is upon us, it may be time to revisit your daily profitability and close the doors on specific days. No need to worry, I cover all the details here in my restaurant daily report to track profitability post.
Analyze such changes and trends during recessions and cut out certain meals or days altogether.
Utilize the Bar
If you have a bar in your restaurant, drinks provide better margins (or should if you are running your bar correctly). Turn your attention to sell more drinks.
For instance, highlight these items in your advertisements. Have the servers promote them while taking orders. Most of the time, the margins are healthy even when discounting, so get the customers to get spending.
Identify Recession-Proof Revenue Streams
Even in a recession, people will still eat food. It may not be sitting down for a four-course meal at your restaurant, but you can go to them in different ways to profit from their food consumption. This approach simply takes thinking about serving your customers in different ways.
Have a plan ready, so when the foot traffic decreases, you can quickly pivot to other revenue-making streams. Here are some examples of how restaurants can pivot:
Offer Meal Kits
Think like something similar to IKEA but for food. Your kit will have pre-measured ingredients and ready to cook recipes with easy to follow directions. For instance, you own a pizzeria. You can sell your special “house sauce” in these kits and include dough, cheese and some meat cuts/veggies that go on the pizza.
This way, you do not give out your exclusive recipes away, but rather can sell your goods and use your resources in different ways. This example is excellent for tough times as customers want to splurge but do so on the cheaper side.
Open Your Restaurant Space for Corporate Events
Many organizations and corporations will still want to host events and conferences, meet-ups, and so on. Especially during the recession, they will want to avoid expensive banquets and large commercial spaces. Give them a cheaper package by opening your restaurant space to host events as per their liking.
You can have these events on days/times where you have the least organic foot traffic. This way, you do not disappoint your regular customers and also use the downtime to maximize your profitability.
You have been selling a good collection of wines with your food, why not capitalize that in different ways? For instance, you can host a wine-tasting event at your restaurant. Instead of your full menu, you only sell wine and sides that go best with the wine. You can include your highest margin dishes, and drinks usually have good margins anyway. So even if it is not a full event, with the limited guest, you can still expect good revenues due to the optimization of your menu.
Take it a step further and have a full-blown wine night. Pair some excellent wines with a full course meal, charge a hefty price per head, and focus on your more affluent customers. This technique ensures you reach your revenue goals while ensuring you have a full house but taking reservations in advance.
For higher-end establishments, this could mean having a special chef come to visit or bringing in high-end music; the possibilities and dollars are endless. All you have to do is be creative.
Your neighborhood university organizes an afternoon get together every Thursday for their students with beer and finger foods. The nearby hospital hosts a lunch every Monday for all their staff and conducts a town hall.
Try to find out such opportunities and build long-lasting partnerships for your restaurant. These side gigs will help you keep the cash inflow even when the regular customers in the restaurants are not contributing to previous levels.
Track Profitability Daily
During an economic crisis, identifying trends will help you understand which areas need your attention and resources. When we say patterns, we refer to not just external trends, but also internal numbers. Online orders going down? Find ways to provide deals to attract customers.
You can only find this downward trend if you monitor your performances regularly.
This approach might seem like a daunting task, but don’t worry, I walk you through how to set up an excellent excel workbook to track your daily performance in my restaurant daily report to track profitability post.
Here are some reports and metrics you can set-up to analyze your performance regularly and spot any outliers:
This approach will be a daily report for real-time analysis. It will contain the daily sales summary, including key metrics like sales, labor, discounts, wastages, etc. It is focused on perfecting your day-to-day operations. It is essentially the summary page of my breakeven daily report.
We discussed in this piece how you should focus on profitable items and reduce the lesser profitable ones for the tough times. Menu analysis will help you do so.
It will analyze the sale and profitability of each menu item, and include layers to this such as promotion, prices, costs, profitability, and more.
You always project your demand and create inventory levels accordingly. Now comparing these predicted numbers to the actual numbers will help you understand variances and optimize accordingly. The report should include stock, usage, wastage, and more.
It could also add layers of different pricing from suppliers, missed out demand, etc.
Labor is one of the prime costs (major expenses) for every restaurant. This report contains drilled-down details to understand labor on-duty vs. actual labor needed.
For instance, you need two servers for every seven tables at a time, but only three were full today. So you could cut down one of your servers to save on costs.
Build your rainy day fund
Rainy day funds are one of the most critical safety nets for small businesses, like restaurants. When times get tough, seasonality strikes harder, every unforeseen situation compounds. The best way to avoid these mistakes and challenges from putting you out of business is to have substantial cash reserves.
Mainly when you see reduced sales for an extended period, a rainy day fund can cover replacing that broken over when you do not have enough revenue to cover the expense or capital improvement.
By a standard rule of thumb, your rainy-day fund should be about 1-2 months of your operating costs. This fund would be on top of the working capital in the business, which should cover one month of operating expenses, not including the cost of goods related items.
You must take a look at your restaurant and decide accordingly.
For instance, if your kitchen is dated and the equipment is quite old, and you have costly annual repairs, you might want to save more. If you only have one source of revenue stream, then you might want to have a more significant fund as a safety net. The amount in your fund dictates your business’s risk profile.
Review and Reduce Expenses
This step seems like a no-brainer, and we have already covered this approach in this piece. However, there are still many avenues where you can cut out costs and increase your margins.
Following some principles and areas can help you do so, here are some more general and then recession-specific ways to bring down your expenses.
Reduce Food Wastage
Burnt food, returns by the customers, preparation errors, food is thrown away, and spillage is common in every restaurant, but the amount can vary based on your optimization.
Monitor situations leading to food wastage and then devise solutions to reduce it. For instance, portion controls of items that usually show a lot of wastage.
Avoid Theft and Pilferage
It is not uncommon and happens in most businesses. It is much harder to track in the restaurant industry, but that is what separates the great business leaders from the mediocre.
Automating accounting and sales processes, closely monitor operations, and take other steps to reduce or even eliminate theft. Try to find unexplained discrepancies in the numbers and create solutions to overcome them.
Increase Energy Efficiency
Energy-saving appliances usually come at higher prices, so when you are in the good-times, investing in them can help in the long haul. Spend the extra few hundred dollars today to save you thousands down the road.
Next, look out for energy leaker, much old equipment can consume more than average energy and must be replaced or fixed.
Reduce Unnecessary and High-Costing Products
Unless you are a high-end establishment, during tougher times, it is okay to cut down on high-costing ingredients. For instance, use local vendor’s truffles rather than getting it from imported shops. You can use regular butter instead of organic versions.
So on and so forth, unless it directly conflicts with your branding or value proposition.
Find Alternative Ways of Marketing
Recession is your time to switch to more organic and creative methods to get that customer attention and engagement. Instead of discounts, go for social media competitions and selective prizes.
Instead of large scale decor for festivities, go for menu and dish changes to get into the festival mood. Instead of giving out free merchandise, sell out your merch if you have the following.
Look for Additional Financing Options
Fundraising, an already intimidating process, can seem even more so just before a recession. However, if you are optimistic about your business, this approach could be a good life-saving raft for the stormy weather.
Having strong backers financially in addition to advisers can allow you to have a smoother and less stressful journey through the recession.
For further deep-dive into financing options, read our piece that explores different options available for restaurants.
Final Thoughts on Preparing for the Recession
Markets have cycles. To have the good, we must, in turn, have the bad. As a smart restaurant owner and operator, you can get ahead of the curve by preparing for the recession and its effect on your restaurant before it occurs.
Use our tips outlined in this article to prepare your restaurant for the coming recessionary environment.